Efficiency of the market
The assumption of efficiency of the market or HEM , due to Eugene Fama, in particular was used for work having led to the model CAPM ; she considers that in a sufficiently broad market where information is spread instantaneously, as it in particular Stockmarket is the case, the operators react correctly and quasi immediately to the information if they have the cognitive capacity to interpret them with accuracy.
Consequently, the courses would always be equivalent to the Fair price and would evolve/move according to a random Marche with the liking of the surprises which new information brings.
Origin and environment of the assumption
This assumption, developed in the Fifties to 60 at the time of the application of probabilistic mathematics (Stochastic) to finance, was the support of important advanced financial modeling, having involved in its turn the fast development of new tools of Finance of market.
Limits of efficiency
This theory is chipped by research in behavioral Finance which showed that cognitive and emotional errors collective distort the pricing of the rates. It is thus increasingly allowed that one must rather speak about some degree of efficiency for the markets. The observation of the existence at certain times of Crash S and bubbles is part for example of this analysis by behavioral finance.
The political field
Some move away however from the simple analysis and draw the political conclusions aiming to deny any efficiency at the market and to impose the catch in official hand of the economy. That poses the parallel problem of the Efficience of the State, that some regard on their side as as much, if not more, debatable.It is necessary to leave this dead end, to know what one indicates by " efficience" : as regards the productive allowance of the resources, the market is theoretically, and empirically, like showed it the failures of planning in all its forms (public, or deprived in the form of the monopoly), the only effective option. The capacity to ensure full employment, it, is limited by rigidities of the prices, and the irreducible imperfection of competition. And the need for the repair of these insufficiencies differs from the negation of the role of the market which would consider it basically ineffective, contrary thing with the good sense and all the historical examples.
See too